How Recurring Transfers Can Help You Build Wealth

Over time, recurring transfers can help you build a solid safety net.
Last updated Nov 2, 2019 | By Kat Tretina
Man setting up a recurring transfer

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According to the Federal Reserve, 40% of American adults don’t have enough money in the bank to cover the cost of a $400 emergency. And if you’re living paycheck to paycheck, breaking the cycle and setting aside cash for a safety net can be difficult.

One way to tackle this problem is to set up a recurring transfer, where you schedule regular deposits into a savings or investment account. Over time, those deposits can add up, giving you a substantial cash cushion.

What is a recurring transfer?

When it comes to saving money, some people pay their bills for the month and, if anything is left over, transfer the remainder over to their savings account. The problem with this approach is that it’s easy to find ways to justify spending that extra money. Before you know it, you’ve quickly frittered away your remaining cash.

Setting up a recurring transfer offers a solution to this common problem. A recurring transfer is when you automate deposits, usually transferring money from a checking account to a savings account. You choose how much you want the recurring transfer to be and how often you want it to occur. For example, you could set up a recurring transfer to deposit $25 every Friday into your savings account.

You can set up recurring transfers for many different accounts. While transferring from checking to savings is one of the most common uses, you can also set up recurring transfers to your retirement accounts or investing accounts, such as your 401(k) or IRA (Individual Retirement Account).

Bank transfers can take several days to complete. Depending on your bank, you could have to wait two or three business days for the transaction to clear.

How to use recurring transfers to your advantage

Over time, recurring transfers can be effective savings tools. You might use these transfers to reach goals, such as:

  • Bulking up your savings: If you keep your recurring transfers active, you can see big rewards. If you saved $25 per week for one year, you’d have $1,300 tucked away in savings.
  • Preventing “lifestyle creep”: Lifestyle creep occurs when you start earning more money — and immediately start spending more, too. Luxuries become necessities, and even though you’re earning more, your financial situation doesn’t change much.

    If you get a raise, consider setting aside more money by creating a recurring transfer for the increased amount. For example, if your paycheck goes from $400 a week to $450, you’d set up a recurring transfer and send the extra $50 to your savings account each week. This is a great way to stop yourself from increasing your spending so you can pursue your financial goals.
  • Taking advantage of dollar-cost averaging: If you set up recurring deposits into an investment or retirement account, you could use dollar-cost averaging to your advantage. It’s a strategy where you buy investments at regular intervals in the same dollar amount; over time, your investments grow along with the market, helping you reap long-term rewards.

When setting up a recurring transfer, it’s important to keep your budget in mind. Think about how much money you have coming in versus the expenses you have. By setting up a recurring transfer, you ensure that your money has a purpose.

Then come up with a transfer schedule that makes sense for you. You may decide that setting up a transfer to coincide with your payday makes sense, or you may prefer to do one larger deposit once a month.

Pros and cons of recurring transfers

Recurring transfers can be very useful, but there are some pros and cons you should keep in mind.

Pro: Recurring transfers are convenient

When you set up a recurring transfer, you automate the savings process. Your bank will handle every transaction for you, so you don’t have to worry about logging into your account every week or month to manually do it.

Pro: You can set it and forget it

Recurring transfers take the decision-making out of saving money. When you setup a recurring transfer, the bank will move the money into your savings without you even realizing. This way, you probably won’t miss the money being deposited, and there’s less risk of you spending it instead of saving it.

Con: You risk overdrafting your account

If you set up a recurring transfer, it’s important to keep a certain balance in your primary account. Otherwise, you risk overdrafting. Your bank will try to complete the transfer even if you don’t have enough money in the account, possibly subjecting you to costly overdraft fees if your balance is low.

Con: You have to remember to cancel a recurring transfer

If you switch banks or need to stop transferring money, you have to remember to log into your account and turn the transfer off. Otherwise, recurring transfers will keep happening, draining your account.

Managing your money

If you have trouble finding the extra money needed to save or invest, setting up recurring transfers can be a smart solution. You’ll automate the process and set aside money before you can spend it. Over time, recurring transfers can help you build long-term wealth.

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